Meta wants to sweat its servers for longer – at a cost of $60b
Even as the ad market chills and share price slumps
Meta's share price has taken a twenty percent dive after investors marked down the social media company's datacenter infrastructure spending, as well as weakness in the ad market.
The home of Facebook, Instagram, WhatsApp, and various metaverse experiments today reported [PDF] Q3 revenue of $27.7 billion – a four percent dip compared to Q3 2021's $29 billion. Net income dropped 52 percent year over year, to a mere $4.4 billion. The company's shares opened at $132 apiece, but by day's end could be had for $105.
CFO Dave Wehner attributed the dips to what he described as "weak advertising demand, which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape."
Sorry to be the bearer of bad news, but Meta – like Microsoft, Logitech, Google, SK hynix, and almost every other business whose results we've covered lately – is bracing for tough economic times.
Wehner said the company has therefore "increased scrutiny on all areas of operating expenses."
But tech infrastructure and the datacenters to house it are immune to that scrutiny apparently. Meta thinks the money it is spending now will save it cash in the future.
Wehner explained that Meta is currently "in a datacenter investment cycle to build more headroom in our datacenters."
Core compute-oriented servers are the target for that effort.
"Having more datacenter headroom will allow us to extend the life of servers over time because we won't have to replace them due to power constraints," Wehner said. "Part of that is to get more efficiency over time out of the CPU-based server fleet."
Meta is also spending up big on an entirely new fleet of servers running GPUs to power AI applications. Wehner said those boxes are expected to deliver "a technology advantage and unlock meaningful improvements across many of our key initiatives, including Feed, Reels and ads."
In other words, better personalization of content and ads, so that users of Meta's products spend more time on the Reels short video product that the company hopes will enable it to compete more effectively with TikTok.
Or as CEO Mark Zuckerberg put it: "Over time, I expect a few things to set our products apart here. First is that our discovery engine work allows us to recommend all types of content beyond Reels as well, including photos, text, links, communities, short and long-form videos and more. Second is that we can mix this content alongside posts from your family and friends, which can't be generated by AI alone."
"Third is more social interactions move to messaging. We are developing a flywheel between discovery and messaging that is going to make these apps stronger."
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Wehner said Meta will be "carefully evaluating the return we achieve from these investments, which will inform the scale of our AI investment beyond 2023."
For now, the scale of those investments is colossal: the company spent $9.5 billion on it in Q3, expects FY 2022 capex will land between $32 billion and $33 billion, and forecast spend of between $34 billion and $39 billion in 2023. While not all of that dough will go on tech, Wehner said it is "driven by our investments in datacenter servers and network infrastructure."
Meta also revealed that Reality Labs – the division dedicated to all things metaverse – lost $3.7 billion in the quarter and has burned through $9.4 billion for the year. Last year's Q3 loss was $2.6 billion and the deficit for the first three quarters of 2021 was $6.9 billion. Shareholders fear Meta could spend $100 billion on the effort and still not turn a profit.
As with its massive datacenter spend, Zuckerberg said Meta's meta-investments are setting up the company for future success. But he also admitted sales of the Quest II VR headset waned in this quarter.
Investors clearly aren't sure Zuck's plan has any connection to reality – virtual or otherwise. Meta's share price has fallen by over 50 percent during 2022. Today's dip came after the company predicted Q4 revenue of $30-32.5 billion, down from 2021's $33 billion. Meta said it would predict better results were it not for foreign exchange swings, but that's an issue that impacts every multinational business. ®